Risk management, strategy and analysis from DeloitteCONTENT FROM OUR SPONSORPlease note: The Wall Street Journal News Department was not involved in the creation of the content below.

Text Size

Regular

Medium

Large

Google+

Print

Asia Pacific Economic Outlook, March 2014: Weekend Reading

The March 2014 edition of the Asia Pacific Economic Outlook from Deloitte University Press provides near-term perspectives of Cambodia, China, Japan and Singapore.

Cambodia: Time to change some things. Rising political strife in Cambodia threatens to derail a decade of strong economic growth. Tensions went up after the 2013 elections, when the Cambodian People’s Party retained power but the opposition cried foul. The latter hit the streets, encouraged by growing ranks of politically conscious youth. “Workers have also joined the protests, demanding a doubling of minimum wages among other things. This protest in turn has hit the manufacturing sector, especially textiles,” says Akrur Barua, an economist and manager at Deloitte Research, Deloitte Services LP.

The government and opposition must come together to resolve this impasse and prevent further damage to the economy. Their working together should serve as an opportunity to reform key institutions and take Cambodia to the next level of socioeconomic development.

China: Avoiding a shadow banking crisis. “Recent events threaten to cause a sea change in China’s shadow banking system, which could lead to a severe shrinkage of credit growth and consequently slower economic growth,” says Dr. Ira Kalish, chief global economist of Deloitte Touche Tohmatsu Limited. A large part of credit growth in China has involved the shadow banking system, and a large part of that system has involved the sale of securitized loans sold by banks. These “wealth management products” (WMPs) are bundles of bank loans sold as securities to investors. “While the banks don’t guarantee a positive return on these assets, they have generally paid investors principal and interest even when the loans behind the securities have failed. Yet that nearly changed recently,” adds Dr. Kalish.

ICBC, one of China’s state-run banks and the world’s largest bank, initially refused to reimburse investors who purchased a WMP for which the bank acted as custodian and sales agent. The principal amount for the WMP was $495 million. The WMP was arranged by a trust company, and the principal amount was, at one time, in danger. Although there have been defaults of some small WMPs, the threat of default on a large one was a sea change. Previously, investors who purchased WMPs believed that the high interest rate they obtained was virtually guaranteed, even though there was no explicit insurance against default. If the implicit guarantee is broken, the risk is that investors will shun WMPs. In addition, investors might become averse to excessive risk. The money banks obtain when they sell WMPs is used to fund off-balance-sheet trust companies that provide further lending through the shadow banking system. If the supply of funds for WMPs dries up, the shadow banking system could dry up as well—leading to a severe shrinkage of credit growth and consequently slower economic growth. As such, the surprising move by ICBC might have huge ramifications.

As for ICBC, after threatening to allow investors to lose money, it said that investors will be able to recoup their principal investment by selling the assets to an unnamed buyer—and thus a default has been avoided.¹ However, there is concern that ICBC’s action will encourage other investors to engage in excessively risky behavior, knowing that they cannot lose. On the other hand, a default would have wreaked havoc with Chinese and global financial markets, which are already uneasy.

Japan: Good start to 2014, but uncertainty ahead. “While there are signs that Japan’s economy is breaking free from years of poor growth and deflation, rising external and internal imbalances are a cause for concern,” says Dr. Rumki Majumdar, a macroeconomist and manager at Deloitte Research, Deloitte Services LP. The year 2014 has begun with mixed news for Japan. The GDP data for Q4 2013 suggest that Japan’s economy grew at a much slower pace than expected at the end of last year relative to the previous quarter. However, there are signs that the economy is breaking free from years of poor growth and deflation. The real GDP growth of 2.7%year over year in Q4 2013 and was primarily fueled by domestic demand, as consumer spending and business investment gathered momentum. The latest manufacturing, investment and employment data corroborates that this momentum was well sustained in the fourth quarter as well.²

However, net exports, a traditional driver of Japan’s economic growth, remained sluggish in Q4 2013, despite strong growth in exports supported by a weak domestic currency. The benefits of the cheap Japanese yen for the export-driven economy were offset by a steady rise in energy imports post the tsunami of 2011.

Singapore: Challenges amid optimism. Singapore’s economy continues to expand at a steady pace, aided by healthy domestic demand and a strong services sector. Encouragingly, external demand is also edging up as the United States and Europe start recovering. “However, there are concerns about rising household debt, a possible housing bubble and emerging-market weakness,” says Mr. Barua. At a more structural level, the government’s efforts to enhance productivity and develop high-tech sectors in manufacturing will take time to bear fruit and hence keep the sector under pressure. Policymakers also face a tough challenge in ensuring high growth in the long term amid an aging population and popular opposition to immigration.

Read the full report to learn more about the near-term economic outlook for each of these Asia Pacific countries.

Endnotes1. GDP numbers had not been published at the time of this writing.2. Ministry of Economy, Trade, and Industry, “Indices of industrial production (Jan. 2008 – Dec. 2013),” updated January 31, 2014, http://www.meti.go.jp/english/statistics/tyo/iip/b2010_result-2.html.
Statistics Bureau, Ministry of Internal Affairs and Communication, “Labour force survey: Monthly results, December 2013,” released January 21, 2014, http://www.stat.go.jp/english/data/roudou/results/month/index.htm.

Related Deloitte Insights

The transformation of the electric power industry is poised to accelerate in 2018 through the increased use of digital technologies and the growth of electric vehicles. Scott Smith, vice chairman and leader, U.S. Power & Utilities, Deloitte LLP, discusses trends driving the industry in the near term, including changes in the generation fuel mix, a strengthened commitment to addressing cyber and physical security risks, and digital transformations that involve self-healing networks and advanced customer service.

It is still the early days for the digital revolution in the oil and gas industry, however, organizations that are willing to innovate and invest could unlock a competitive advantage. John England, vice chairman and U.S. Energy and Resources leader for Deloitte LLP, shares his insights about the growing role of the U.S. as an energy exporter, the ability of U.S. shale oil and natural gas producers to lower costs, the outlook for OPEC supply levels, and how digital innovation is impacting the oil and gas value chain.

For the past several quarters, many CFOs have indicated that they remain optimistic about their company prospects, their country prospects and their growth expectations—even as they voice alarm over escalating geopolitical risks and political turmoil. In this quarter’s Global CFO Signals, finance leaders in many of the 23 countries and regions surveyed seem, once again, to be shutting out the noise and focusing on the positive. But there are some regional differences worth noting.

Views & Analysis

Although board seats don’t become available all that often, as more organizations broaden their definition of diversity the pool of potential candidates is expanding. What does it take to land such a spot? Industry and international experience, a knowledge of risk and technology issues, and personal traits that range from intellectual curiosity to unassailable integrity are just some of the qualities and qualifications that matter. Learn how to assess your viability and what steps you might take to enhance your appeal to search committees.

Continued uncertainty about the economy and increased regulation across several industries have required a more informed and efficient use of capital. Working with management, the board of directors can play a fundamental role in the capital allocation process through its oversight function, including participating in strategy development, examining risks, comparing strategy to results and focusing on key investment terms. Understand how boards can help guide the capital allocation process by challenging business plans and strategy, and reviewing capital allocation alternatives, among other efforts.

As proxy season approaches, several governance issues and proposals are likely to emerge, reflecting shareholders’ increased attention to how companies’ stances on governance matters can impact shareholder value, according to Carol Schumacher, who has held roles as investor relations (IR) officer and corporate affairs officer at a Fortune 10. She discusses shareholders’ expectations for the governance information that management provides, and what IR can do to help companies respond, in a conversation with Sanford Cockrell III, U.S. national managing partner, CFO Program, Deloitte LLP.

Editor's Choice

Boards and C-suite executives overwhelmingly see risk as having an important role in value creation, but just 17% of respondents say they are actively using risk to drive returns, according to a new global survey from Deloitte. The survey also found that senior stakeholders want chief risk officers to spend significantly more time playing the strategist role, with a majority of respondents saying their risk officers should participate more in setting the strategic direction of the company and aligning risk management strategies accordingly.

Traditionally, internal audit (IA) has focused on providing assurance with respect to known risks and the effectiveness of controls in mitigating those risks. Regulators, however, are increasingly interested in an organization’s ability to identify blind spots and other vulnerabilities that may undermine the integrity of the risk management environment, including the risk of misconduct. IA functions can play a pivotal role by substantively testing culture and identifying potential risk-related outliers that may not be visible via other means, such as supervisory frameworks, escalations, compliance assessment and testing, and previous audits.

Identifying and managing strategic risks can be a difficult task. To add to the challenge, many companies have traditionally separated their risk and strategy functions and think of risk as more of a compliance responsibility rather than a dynamic tool for value creation, business performance management and growth. However, companies that align strategy and risk can be better served to allow for a process of “strategic resiliency,” which involves anticipating, knowing and acting on risks when introducing or executing new strategies as a way of increasing the chances of success in spite of uncertainty.

About Deloitte Insights

Deloitte’s Insights for C-suite executives and board members provide information and resources to help address the challenges of managing risk for both value creation and protection, as well as increasing compliance requirements.